Islamic Microfinance - Murabaha

2. Islamic Microfinance - Murabaha By: Abdul Samad AlHuda Centre of Islamic Banking & Economics (CIBE)

3. Presentation Outline • This module will highlight the following aspects of Murabaha • Step by Step Murabaha Financing • Documentation • Profit Calculation • Issues • Conclusion

4. Murabaha - Definition /Introduction In literary terms Ba’yMurabaha means “sale on profit” Murabaha is a particular kind of sale where the seller discloses the cost and profit charged thereon. The price in this sale can be both on spot and deferred

5. IMFI Murabaha • The product of Murabaha that is being used in Islamic MFI as a mode of finance is something different from the Murabaha used in normal trade. • This transaction is concluded with a prior promise to buy, submitted by a person interested in acquiring good/s through the institution.

6. IMFI Murabaha • It is a contract wherein the institution, upon request by the customer, purchases an asset from the third party usually a supplier/vendor and resells the same to the customer either against immediate payment or on a deferred payment basis.  • It is called Murabaha to the purchase order. • It is a bunch of contracts completed in steps and ultimately meets the financial needs of the client.

7. Scope of Murabaha • As it is a kind of sale, there must be a seller and buyer and something that is bought and sold. The institution is the seller and the client is buyer.  • It cannot be used as a substitute for running finance facility, which provides cash for fulfilling various need of the client. • It is fixed price sale and normally is done for short term. • The transaction can be used in order to meet the working capital requirement however it cannot be used to meet liquidity requirements.

8. IMFI Client Agreement to Murabaha Step by Step Murabaha Financing Client and IMFI sign an Agreement to enter into Murabaha (MMFA).

9. IMFI Client Agency Agreement Step by step Murabaha Financing Client appointed as Agent to purchase goods on IMFI’s behalf. In this case, the concerned branch Manager will explain the appointment of client as an Agent, which will be checked by the Shariah Advisor.

10. Supplier IMFI Client Agency Agreement Disbursement to the agent or supplier Agreement to Murabaha Step by step Murabaha Financing IMFI gives money to agent/supplier for purchase of goods.

11. Vendor Delivery of goods Transfer of Risk Agent IMFI Step by Step Murabaha Financing The agent takes possession of goods on IMFI’s behalf.

12. IMFI Client Offer to purchase Step by Step Murabaha Financing Client makes an offer to purchase the goods from IMFI through a declaration.

13. Murabaha Agreement + Transfer of Title IMFI Client Step by step Murabaha Financing IMFI accepts the offer and sale is concluded.

14. IMFI Client Payment of Price Step by step Murabaha Financing Client pays agreed price to IMFI according to an agreed schedule. Usually on a deferred payment basis (Bai Muajjal)

15. Steps in IMFI’s Murabaha MOU  Order Form  Agency Agreement  Purchase  Payment of Purchase Price‌  Possession  Offer and Acceptance (Declaration)  Payment of Murabaha Price

16. Murabaha Documentations There are a number of documents involved in a Murabaha financing transaction. The most essential of these documents are: • Master Murabaha Facility Agreement • Agency Agreement • Order Form • Description of assets • Declaration • Summary Payment Schedule

17. ISSUES RELATED TO MURABAHA

18. Issues Related To Murabaha

19. EVIDENCE OF PURCHASE

20. PHYSICAL VERIFICATION OF GOOD

21. DELAYED DECLARATIION

22. ABSENCE OF DATES ON DECLARATION & INVISES

23. DIFFRENCE IN QUANTITIES

24. DISCOUNTS IN MURABAHA

25. REBATE

26. PRICING IN MURABAHA

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